Watson Living Inc. is joining a bevy of startups that are helping landlords give people rewards for essentially being good tenants.

The company has built a digital banking app with an associated debit card that landlords fund each time a renter pays rent on time, signs a renewal lease early, or refers others to rent in the same building.

The...

Watson Living Inc. is joining a bevy of startups that are helping landlords give people rewards for essentially being good tenants.

The company has built a digital banking app with an associated debit card that landlords fund each time a renter pays rent on time, signs a renewal lease early, or refers others to rent in the same building.

The startup’s founders see Watson—which recently raised a $2.5 million seed round led by Ulu Ventures, with participation by Trail Mix Ventures, FJ Labs and Gaingels—as part of a wave of integrating financial technology into real estate and other industries.

“You’ve got this massive opportunity, where financial services are not seamlessly built into all the infrastructure that facilitates the interactions between residents and landlords,” said Andrew Firestone, Watson Living’s co-founder and chief operating officer.

Watson charges a subscription fee to landlords, Mr. Firestone said. In return, the startup says it can help real-estate owners and operators save money by better retaining tenants and getting their payments in on time, Mr. Firestone said.

“We can increase lease renewals, we can increase on-time payments, we can increase resident engagement,” he said.

The company has several beta customers, including Los-Angeles based Schon Tepler Group Inc. and Chicago-based Catalyst Realty LLC and CMG Realty & Property Management LLC. Early demand tends to come from fully integrated owner operators of properties that range from Class A to Class C and located in up-and-coming neighborhoods of large metro areas, Mr. Firestone said.

Other startups in this sector include Bilt Technologies Inc., launched in June, which offers credit-card points for rent payments. The New York company announced a $60 million growth funding round, valuing it at $350 million, from Wells Fargo & Co., Mastercard Inc. and real-estate owners including Blackstone Inc., AvalonBay Communities Inc., and Douglas Elliman.

Piñata Global Inc., meanwhile, launched a rent-rewards app last year. Piñata, which raised more than $5 million since last year from investors including Moderne Ventures, is working with more than 400 property management companies and has more than 100,000 users on its platform, according to Lily Liu, the startup’s co-founder and chief executive. In Piñata’s case, renters can earn rewards and get credit reporting to improve their credit scores without having to change the method of rent payment, Ms. Liu said.

These startups are gaining traction partly because the rental market is large and rents are rising, stressing tenants.

Roughly 44 million U.S. households, or 36% of the total, live in rented housing, according to the National Multifamily Housing Council. That share has stayed fairly steady over time, according to Chris Bruen, the trade group’s senior director of research.

Rent costs have been growing quickly after a dip last year. The median asking rent for vacant units in the second quarter of this year reached a record of $1,228, according to the Census Bureau. That’s up from just above $1,000 in the year-earlier quarter.

The real-estate industry, meanwhile, is becoming more technically savvy, Watson’s Mr. Firestone said, and many landlords are attempting to build a brand, changing the transactional relationship they have with tenants into something with greater staying power.

But building a large business in this sector might be a challenge, according to Dave Eisenberg, managing partner at Zigg Capital, a real-estate-tech venture firm. Mr. Eisenberg said he has passed on some deals in the sector so far.

Rent payments typically happen only 12 times a year and landlords and consumers are very price sensitive, he said, which means the margin extracted from such transactions by service providers would likely be minimal, he said.

“Payments innovation is a complex and fascinating area ripe for improvement, we just have not yet been convinced that rental payments, which are only remitted [12 times per year], are one of the best avenues for disruption,” Mr. Eisenberg said.

Watson plans a full launch in November, Mr. Firestone said, and it expects to add features such as enabling rent-payment reporting to credit bureaus next year.

“A component of the rent-rewards equation means that renters can build their credit score through a history of on-time payments of their largest living expense, which is a terrific trend,” Mr. Eisenberg, of Zigg Capital, said, adding he expects more competition to come to this sector, including from general digital banking apps.

Write to Yuliya Chernova at yuliya.chernova@wsj.com